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Capital Gains Tax - PRR and Lettings Relief I have a client

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Capital Gains Tax - PRR and Lettings Relief
I have a client that bought a house in Jan 2006 for £468k and moved in Sept 2006 after renovations. She has always lived in the house. She let 3 of the four bedrooms from Sept 2006 to Dec 2011, and then let 2 of the four bedrooms from Jan 2012 to date. She is planning on selling the property in Dec 2015 for £1.6m, yielding a gross gain of £1,132k. She has spent £26k on purchases costs, £16k on selling costs and £171k on renovations, totalling £213k, yielding a net gain of £919k.
To calculate the split between let and owned, I took the square footage of the let rooms as a total of the whole house over all years of ownership, after accounting for 100% ownership in the first 9 months (renovations) and the last 18 months (as allowed by HMRC). I calculate her to have let the property for the equivalent of 20 months out of a total of 120 months.
For PRR, I calculated that she is entitled 100 months out of 120 months against the £1,132k gain, giving relief of £941k.
For lettings relief, I allocated £40k (the lower of PRR (£941k), lettings relief (£190k) and £40k).
The final gain would then be:
Net gain £919k
Less Lettings Relief (£40k)
Less PRR (£941k)
Loss for CGT £62
She has also sold another property (purely an investment property) in the same tax year, netting a gain of £74k.
I offset the gain of £74k against the loss of £62k, meaning that she has a total amount liable to CGT of £12k before deducting the annual CGT-free allowance.
Are you able to confirm that I have calculated this correctly and applied the reliefs correctly?
Much appreciated.
Submitted: 1 year ago.
Category: Tax
Expert:  Sam replied 1 year ago.
Hi Thanks for your question - I am Sam and I am one of the UK tax experts here on Just Answer.If she lived in this property until sale date then there is NO 18 months PPR - as this only applies when an individual ceases to use the property as a main residence - but does not sell straight away. The gain should be calculated as follows - Time lived there/total period of ownership for form the PPR entitlement, which I agree the first 8/9 months are allowable plus the time she lived there.But then this ALL needs restricting for the fact she let out rooms So for the period Sept 2006 to Dec 2011 3/4ths must be disregarded for PPR (63 months)For the period Jan 2012 to date of sale 1/2 must be disregarded for PPR so based on an expected sale date in Dec 2015 - (47 months) which would see a total ownership period of 119 months of which she has lived there for all that time and a gain of 919K So restrict Then £919,000 x 63/119 x 3/4 = £364,897Then £919,000 x 47/119 x 1/2 = £181,483This totals £ 546,380 is not covered by PPRPPR relates to the difference - so £919,000 - £546,380 = £372,620 So then we have Private lettings releif which is the lesser of 1) The amount of gain on which PPR is due - which is £372,620 2) the amount of gain left over after PPR has been applied - which is £546,380 OR 3) £40,000 So then £40,000 is deducted from the remaining gain of £546,380So the final capital gain is £506,380 You had failed to take into account the fact the property has not bee used 100% by her - and you use the room method rather than the square footage. Then if she has a previous loss of £62,000 this can be brought forward to reduce the gain to £444,380 and the first £11,100 will be exempt this year - leaving a final gain of £433,280 liable to capital gains tax. Thanks Sam So of the £919,000
Customer: replied 1 year ago.
Hi Sam,
Thanks so much for your answer. Could you just clarify the two following points:
Room method - The example given http://www.hmrc.gov.uk/manuals/cgmanual/cg64736.htm shows the relief proportion as a percentage, which is how I have calculated it, rather than a room method. Using square footage also shows just the "exclusive" use of the property (http://www.hmrc.gov.uk/manuals/cgmanual/cg64660.htm) : i.e. only the areas of the house let exclusively (i.e. the tenants bedrooms) and not areas which had some use by the owner (i.e. the bathroom and kitchen) are accounted for. Could you confirm where HMRC have stated that we must/should use a room method, and if it is a room method, which rooms are included in the calculation?Last 18 months - The Period of Ownership section (https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet/hs283-private-residence-relief) states "The final 18 months of your period of ownership always qualify for relief, regardless of how you use the property in that time, as long as the dwelling house has been your only or main residence at some point." There is no mention of not living in the property, as you mentioned. Why would this allowance not apply?Much appreciated,
Bethany
Expert:  Sam replied 1 year ago.
Hi Bethany

Thanks for your response

So the tenants only used the bedrooms and not any area of a bathroom,. living room, or kitchen ? And the tenants paid their rent per square footage?
And CG64660 relates to when the part of the hosue which is used exclusively for the purpose of a

trade
business
profession,
or

vocation.
Rental income is not trade income (SChedule D) its Scedule A

The only time that the last 18 month for PPR applies is when a the house has been vacated as the main residence use and a period up to 18 months (if the time between it ceased to be the PPR to the date of sale) or 18 months if the time between it ceasing to be the PPR and date of sale - this was yur clients home up to the date of sale, so you do not then add another 18 months on!

Thanks

Sam




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